Understanding Business Chapter 18 – Flashcards
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finance
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the function in a business that acquires funds for the firm and manages those funds within the firm
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financial management
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the job of managing a firm's resources so it can meet its goals and objectives
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financial managers
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managers who examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm
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short-term forecast
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forecast that predicts revenues, costs, and expenses for a period of one year or less
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cash flow forecast
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forecast that predicts the cash inflows and outflows in future periods, usually months or quarters
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long-term forecast
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forecast that predicts revenues, costs, and expenses for a period longer than 1 year, and sometimes as far as 5 or 10 years into the future
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budget
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a financial plan that sets forth management's expectations, and, on the basis of those expectations, allocates the use of specific resources throughout the firm
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capital budget
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a budget that highlights a firm's spending plans for major asset purchases that often require large sums of money
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cash budget
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a budget that estimates cash inflows and outflows during a particular period like a month or quarter
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operating (or master) budget
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the budget that ties together the firm's other budgets and summarizes its proposed financial activities; estimates the costs and expenses needed to run a business, given projected revenues
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financial control
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a process in which a firm periodically compares its actual revenues, costs, and expenses with its budget
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capital expenditures
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major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights
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debt financing
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funds raised through various forms of borrowing that must be repaid
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equity financing
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money raised from within the firm, from operations or through the sale of ownership in the firm (i.e. stock)
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short-term financing
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funds needed for a year or less
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long-term financing
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funds needed for more than a year (usually 2 to 10 years)
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trade credit
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the practice of buying goods and services now and paying for them later
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promissory note
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a written contract with a promise to pay a supplier a specific sum of money at a definite time
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secured loan
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a loan backed by collateral, something valuable such as property
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pledging
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accounts receivable are used as collateral for a loan; a percentage of the value of a firm's accounts receivable pledged (usually 75%) is advanced to the borrowing firm- as customers pay off their accounts, the funds received are forwarded to the lender in repayment of the funds that were advanced
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unsecured loan
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a loan that doesn't require any collateral
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line of credit
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a given amount of unsecured short-term funds a bank will lend to a business, provided the funds are readily available; this speeds up the borrowing process because the firm doesn't need to apply for a new loan every time it needs funds
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revolving credit agreement
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a line of credit that's guaranteed but usually comes with a fee
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commercial finance companies
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organizations that make short-term loans to borrowers who offer tangible assets as collateral; since these companies usually assume higher degrees of risk, they also usually charge higher interest rates
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factoring
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the process of selling accounts receivable for cash; not a loan, but a sale of a firm's asset
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factor
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a market intermediary (usually a financial institution like CIT Group or a commercial bank) that agrees to buy the firm's accounts receivable, at a discount, for cash
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commercial paper
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unsecured promissory notes of $100,000 and up that mature (come due) in 270 days or less; states a fixed amount of money the business agrees to repay the lender (investor) on a specific date at a specified rate of interest
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debt financing
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borrowing money the company has a legal obligation to repay; firms can borrow by either getting a loan from a lending institution or issuing bonds
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term-loan agreement
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a promissory note that requires the borrower to repay the loan in specified installments
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risk/return trade-off
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the principle that the greater the risk a lender takes in making a loan, the higher the interest rate required
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indenture terms
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the terms of agreement in a bond issue
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secured bond
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issued with some form of collateral, such as real estate, equipment, or other pledged assets
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unsecured bond (debenture bond)
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a bond backed only by the reputation of the issuer
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equity financing
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funds available when the owners of the firm sell shares of ownership to outside investors in the form of stock, when they reinvest company earnings in the business, or obtain funds from venture capitalists
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stock
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stockholders become owners in the organization
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initial public offering (IPO)
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the first time a company offers to sell its stock to the general public
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retained earnings
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the profits the company keeps and reinvests in the firm
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venture capital
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money that is invested in new or emerging companies that are perceived as having great profit potential
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venture capitalists
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people who invest in a business in return for part ownership of the business
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leverage
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raising needed funds through borrowing to increase a firm's rate of return
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cost of capital
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the rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders
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Chief Financial Officer
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This is the senior manager who is responsible for overseeing the financial activities of an entire company. This includes signing checks, monitoring cash flow, and financial planning
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The Functions of a Financial Manager
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planning, budgeting obtaining funds, controlling funds, collecting funds, auditing, managing taxes, advising top management on financial matters
